CHARLIE MUNGER ON THE

PSYCHOLOGY OF HUMAN MISJUDGMENT

Speech at Harvard University
Estimated date: June, 1995

Transcription, comments [in brackets] and minor editing by Whitney Tilson (feedback@tilsonfunds.com)

Moderator: and they discovered extreme, obvious irrationality in many areas of the economy that
they looked at. And they were a little bit troubled because nothing that they had learned in
graduate school explained these patterns. Now I would hope that Mr. Munger spends a
little bit more time around graduate schools today, because weve gotten now where he
was 30 years ago, and we are trying to explain those patterns, and some of the people who
are doing that will be speaking with you today.

So I think he thinks of his specialty as the Psychology of Human Misjudgment, and part of
this human misjudgment, of course, comes from worrying about the types of fads and
social pressures that Henry Kaufman talked to us about. I think its significant that
Berkshire Hathaway is not headquartered in New York, or even in Los Angeles or San
Francisco, but rather in the heart of the country in Nebraska.

When he referred to this problem of human misjudgment, he identified two significant

problems, and Im sure that there are many more, but when he said, By not relying on
this, and not understanding this, it was costing me a lot of money, and I presume that
some of you are here in the theory that maybe its costing you even a somewhat lesser
amount of money. And the second point that Mr. Munger made was it was reducingnot
understanding human misjudgment was reducing my ability to help everything I loved.
Well I hope he loves you, and Im sure hell help you. Thank you. [Applause]

Munger: Although I am very interested in the subject of human misjudgment -- and lord knows Ive
created a good bit of it -- I dont think Ive created my full statistical share, and I think that
one of the reasons was I tried to do something about this terrible ignorance I left the
Harvard Law School with.

When I saw this patterned irrationality, which was so extreme, and I had no theory or
anything to deal with it, but I could see that it was extreme, and I could see that it was
patterned, I just started to create my own system of psychology, partly by casual reading,
but largely from personal experience, and I used that pattern to help me get through life.
Fairly late in life I stumbled into this book, Influence, by a psychologist named Bob
Cialdini, who became a super-tenured hotshot on a 2,000-person faculty at a very young
age. And he wrote this book, which has now sold 300-odd thousand copies, which is
remarkable for somebody. Well, its an academic book aimed at a popular audience that
filled in a lot of holes in my crude system. In those holes it filled in, I thought I had a
system that was a good-working tool, and Id like to share that one with you.

And I came here because behavioral economics. How could economics not be behavioral?
If it isnt behavioral, what the hell is it? And I think its fairly clear that all reality has to
respect all other reality. If you come to inconsistencies, they have to be resolved, and so if
theres anything valid in psychology, economics has to recognize it, and vice versa. So I think the
people that are working on this fringe between economics and psychology are absolutely right to be
there, and I think theres been plenty wrong over the years.

Well let me romp through as much of this list as I have time to get through:

24 Standard Causes of Human Misjudgment.

1. First: Under-recognition of the power of what psychologists call reinforcement

and economists call incentives.

Well you can say, Everybody knows that. Well I think Ive been in the top 5% of my
age cohort all my life in understanding the power of incentives, and all my life Ive
underestimated it. And never a year passes but I get some surprise that pushes my limit a
little farther.

One of my favorite cases about the power of incentives is the Federal Express case. The
heart and soul of the integrity of the system is that all the packages have to be shifted
rapidly in one central location each night. And the system has no integrity if the whole
shift cant be done fast. And Federal Express had one hell of a time getting the thing to
work. And they tried moral suasion, they tried everything in the world, and finally
somebody got the happy thought that they were paying the night shift by the hour, and that
maybe if they paid them by the shift, the system would work better. And lo and behold,
that solution worked.

Early in the history of Xerox, Joe Wilson, who was then in the government, had to go back
to Xerox because he couldnt understand how their better, new machine was selling so
poorly in relation to their older and inferior machine. Of course when he got there he
found out that the commission arrangement with the salesmen gave a tremendous incentive
to the inferior machine.

And here at Harvard, in the shadow of B.F. Skinner -- there was a man who really was into
reinforcement as a powerful thought, and, you know, Skinners lost his reputation in a lot
of places, but if you were to analyze the entire history of experimental science at Harvard,
hed be in the top handful. His experiments were very ingenious, the results were counter-
intuitive, and they were important. It is not given to experimental science to do better.
What gummed up Skinners reputation is that he developed a case of what I always call
man-with-a-hammer syndrome: to the man with a hammer, every problem tends to look
pretty much like a nail. And Skinner had one of the more extreme cases in the history of
Academia, and this syndrome doesnt exempt bright people. Its just a man with a
hammerand Skinner is an extreme example of that. And later, as I go down my list, lets
go back and try and figure out why people, like Skinner, get man-with-a-hammer
syndrome.

Incidentally, when I was at the Harvard Law School there was a professor, naturally at
Yale, who was derisively discussed at Harvard, and they used to say, Poor old Blanchard.
He thinks declaratory judgments will cure cancer. And thats the way Skinner got. And
not only that, he was literary, and he scorned opponents who had any different way of
thinking or thought anything else was important. This is not a way to make a lasting
reputation if the other people turn out to also be doing something important.

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 2. My second factor is simple psychological denial.

This first really hit me between the eyes when a friend of our family had a super-athlete,
super-student son who flew off a carrier in the north Atlantic and never came back, and his
mother, who was a very sane woman, just never believed that he was dead. And, of
course, if you turn on the television, youll find the mothers of the most obvious criminals
that man could ever diagnose, and they all think their sons are innocent. Thats simple
psychological denial. The reality is too painful to bear, so you just distort it until its
bearable. We all do that to some extent, and its a common psychological misjudgment
that causes terrible problems.

3. Third: incentive-cause bias, both in ones own mind and that of ones trusted
advisor, where it creates what economists call agency costs.

Here, my early experience was a doctor who sent bushel baskets full of normal gall
bladders down to the pathology lab in the leading hospital in Lincoln, Nebraska. And with
that quality control for which community hospitals are famous, about five years after he
shouldve been removed from the staff, he was. And one of the old doctors who
participated in the removal was also a family friend, and I asked him: I said, Tell me, did
he think, Heres a way for me to exercise my talents -- this guy was very skilled
technically-- and make a high living by doing a few maimings and murders every year,
along with some frauds? And he said, Hell no, Charlie. He thought that the gall
bladder was the source of all medical evil, and if you really love your patients, you
couldnt get that organ out rapidly enough.

Now thats an extreme case, but in lesser strength, its present in every profession and in
every human being. And it causes perfectly terrible behavior. If you take sales
presentations and brokers of commercial real estate and businesses Im 70 years old,
Ive never seen one I thought was even within hailing distance of objective truth. If you
want to talk about the power of incentives and the power of rationalized, terrible behavior:
after the Defense Department had had enough experience with cost-plus percentage of cost
contracts, the reaction of our republic was to make it a crime for the federal government to
write one, and not only a crime, but a felony.

And by the way, the governments right, but a lot of the way the world is run, including
most law firms and a lot of other places, theyve still got a cost-plus percentage of cost
system. And human nature, with its version of what I call incentive-caused bias, causes
this terrible abuse. And many of the people who are doing it you would be glad to have
married into your family compared to what youre otherwise going to get. [Laughter]

Now there are huge implications from the fact that the human mind is put together this
way, and that is that people who create things like cash registers, which make most
[dishonest] behavior hard, are some of the effective saints of our civilization. And the cash
register was a great moral instrument when it was created. And Patterson knew that, by
the way. He had a little store, and the people were stealing him blind and never made any
money, and people sold him a couple of cash registers and it went to profit immediately.
And, of course, he closed the store and went into the cash register business

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And so this is a huge, important thing. If you read the psychology texts, you will find that if theyre
1,000 pages long, theres one sentence. Somehow incentive-caused bias has escaped the standard
survey course in psychology.

4. Fourth, and this is a superpower in error-causing psychological tendency: bias

from consistency and commitment tendency, including the tendency to avoid or
promptly resolve cognitive dissonance. Includes the self-confirmation tendency of
all conclusions, particularly expressed conclusions, and with a special persistence
for conclusions that are hard-won.

Well what Im saying here is that the human mind is a lot like the human egg, and the
human egg has a shut-off device. When one sperm gets in, it shuts down so the next one
cant get in. The human mind has a big tendency of the same sort. And here again, it
doesnt just catch ordinary mortals; it catches the deans of physics. According to Max
Planck, the really innovative, important new physics was never really accepted by the old
guard. Instead a new guard came along that was less brain-blocked by its previous
conclusions. And if Max Plancks crowd had this consistency and commitment tendency
that kept their old inclusions intact in spite of disconfirming evidence, you can imagine
what the crowd that you and I are part of behaves like.

And of course, if you make a public disclosure of your conclusion, youre pounding it into
your own head. Many of these students that are screaming at us, you know, they arent
convincing us, but theyre forming mental change for themselves, because what theyre
shouting out [is] what theyre pounding in. And I think educational institutions that create
a climate where too much of that goes on arein a fundamental sense, theyre
irresponsible institutions. Its very important to not put your brain in chains too young by
what you shout out.

And all these things like painful qualifying and initiation rituals pound in your
commitments and your ideas. The Chinese brainwashing system, which was for war
prisoners, was way better than anybody elses. They maneuvered people into making tiny
little commitments and declarations, and then theyd slowly build. That worked way better
than torture.

5. Fifth: bias from Pavlovian association, misconstruing past correlation as a reliable

basis for decision-making.

I never took a course in psychology, or economics either for that matter, but I did learn
about Pavlov in high school biology. And the way they taught it, you know, so the dog
salivated when the bell rang. So what? Nobody made the least effort to tie that to the wide
world. Well the truth of the matter is that Pavlovian association is an enormously powerful
psychological force in the daily life of all of us. And, indeed, in economics we wouldnt
have money without the role of so-called secondary reinforcement, which is a pure
psychological phenomenon demonstrated in the laboratory.

PracticallyId say 3/4 of advertising works on pure Pavlov. Think how association, pure
association, works. Take Coca-Cola company (were the biggest share-holder). They
want to be associated with every wonderful image: heroics in the Olympics, wonderful
music, you name it. They dont want to be associated with presidents funerals and so-
forth. When have you seen a Coca-Cola adand the association really works.

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And all these psychological tendencies work largely or entirely on a subconscious level, which
makes them very insidious. Now youve got Persian messenger syndrome. The Persians
really did kill the messenger who brought the bad news. You think that is dead? I mean
you shouldve seen Bill Paley in his last 20 years. [Paley was the former owner, chairman
and CEO of CBS; his bio is at
http://www.kcmetro.cc.mo.us/pennvalley/biology/lewis/crosby/paley.htm] He didnt hear
one damn thing he didnt want to hear. People knew that it was bad for the messenger to
bring Bill Paley things he didnt want to hear. Well that means that the leader gets in a
cocoon of unreality, and this is a great big enterprise, and boy, did he make some dumb
decisions in the last 20 years.

And now the Persian messenger syndrome is alive and well. I saw, some years ago, Arco
and Exxon arguing over a few hundred millions of ambiguity in their North Slope treaties
before a superior court judge in Texas, with armies of lawyers and experts on each side.
Now this is a Mad Hatters tea party: two engineering-style companies cant resolve some
ambiguity without spending tens of millions of dollars in some Texas superior court? In
my opinion what happens is that nobody wants to bring the bad news to the executives up
the line. But heres a few hundred million dollars you thought you had that you dont.
And its much safer to act like the Persian messenger who goes away to hide rather than
bring home the news of the battle lost.

Talking about economics, you get a very interesting phenomenon that Ive seen over and
over again in a long life. Youve got two products; suppose theyre complex, technical
products. Now youd think, under the laws of economics, that if product A costs X, if
product Y costs X minus something, it will sell better than if it sells at X plus something,
but thats not so. In many cases when you raise the price of the alternative products, itll
get a larger market share than it would when you make it lower than your competitors
product. Thats because the bell, a Pavlovian bell -- I mean ordinarily theres a correlation
between price and value -- then you have an information inefficiency. And so when you
raise the price, the sales go up relative to your competitor. That happens again and again
and again. Its a pure Pavlovian phenomenon. You can say, Well, the economists have
figured this sort of thing out when they started talking about information inefficiencies,
but that was fairly late in economics that they found such an obvious thing. And, of
course, most of them dont ask what causes the information inefficiencies.

Well one of the things that causes it is pure old Pavlov and his dog. Now youve got bios
from Skinnerian association: operant conditioning, you know, where you give the dog a
reward and pound in the behavior that preceded the dogs getting the award. And, of
course, Skinner was able to create superstitious pigeons by having the rewards come by
accident with certain occurrences, and, of course, we all know people who are the human
equivalents of superstitious pigeons. Thats a very powerful phenomenon. And, of course,
operant conditioning really works. I mean the people in the center who think that operant
conditioning is important are very much right, its just that Skinner overdid it a little.

Where you see in business just perfectly horrible results from psychologically-rooted
tendencies is in accounting. If you take Westinghouse, which blew, what, two or three
billion dollars pre-tax at least loaning developers to build hotels, and virtually 100% loans?
Now you say any idiot knows that if theres one thing you dont like its a developer, and
another you dont like its a hotel. And to make a 100% loan to a developer whos going

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to build a hotel [Laughter] But this guy, he probably was an engineer or something, and he didnt
take psychology any more than I did, and he got out there in the hands of these salesmen operating
under their version of incentive-caused bias, where any damned way of getting
Westinghouse to do it was considered normal business, and they just blew it.

That would never have been possible if the accounting system hadnt been such but for the
initial phase of every transaction it showed wonderful financial results. So people who
have loose accounting standards are just inviting perfectly horrible behavior in other
people. And its a sin, its an absolute sin. If you carry bushel baskets full of money
through the ghetto, and made it easy to steal, that would be a considerable human sin,
because youd be causing a lot of bad behavior, and the bad behavior would spread.
Similarly an institution that gets sloppy accounting commits a real human sin, and its also
a dumb way to do business, as Westinghouse has so wonderfully proved.

Oddly enough nobody mentions, at least nobody Ive seen, what happened with Joe Jett
and Kidder Peabody. The truth of the matter is the accounting system was such that by
punching a few buttons, the Joe Jetts of the world could show profits, and profits that
showed up in things that resulted in rewards and esteem and every other thing... Well the
Joe Jetts are always with us, and theyre not really to blame, in my judgment at least. But
that bastard who created that foolish accounting system who, so far as I know, has not been
flayed alive, ought to be.

6. Sixth: bias from reciprocation tendency, including the tendency of one on a roll to
act as other persons expect.

Well here, again, Cialdini does a magnificent job at this, and youre all going to be given a
copy of Cialdinis book. And if you have half as much sense as I think you do, you will
immediately order copies for all of your children and several of your friends. You will
never make a better investment.

It is so easy to be a patsy for what he calls the compliance practitioners of this life. At any
rate, reciprocation tendency is a very, very powerful phenomenon, and Cialdini
demonstrated this by running around a campus, and he asked people to take juvenile
delinquents to the zoo. And it was a campus, and so one in six actually agreed to do it.
And after hed accumulated a statistical output he went around on the same campus and he
asked other people, he said, Gee, would you devote two afternoons a week to taking
juvenile delinquents somewhere and suffering greatly yourself to help them, and there he
got 100% of the people to say no. But after hed made the first request, he backed up a
little, and he said, Would you at least take them to the zoo one afternoon? He raised the
compliance rate from a third to a half. He got three times the success by just going through
the little ask-for-a-lot-and-back-off.

Now if the human mind, on a subconscious level, can be manipulated that way and you
dont know it, I always use the phrase, Youre like a one-legged man in an ass-kicking
contest. I mean you are really giving a lot of quarter to the external world that you cant
afford to give. And on this so-called role theory, where you tend to act in the way that
other people expect, and thats reciprocation if you think about the way society is
organized.

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A guy named Zimbardo had people at Stanford divide into two pieces: one were the guards and the
other were the prisoners, and they started acting out roles as people expected. He had to stop the
experiment after about five days. He was getting into human misery and breakdown and
pathological behavior. I mean it wasit was awesome. However, Zimbardo is greatly
misinterpreted. Its not just reciprocation tendency and role theory that caused that, its
consistency and commitment tendency. Each person, as he acted as a guard or a prisoner,
the action itself was pounding in the idea. [For more on this famous experiment, see
http://www.prisonexp.org.]

Wherever you turn, this consistency and commitment tendency is affecting you. In other
words, what you think may change what you do, but perhaps even more important, what
you do will change what you think. And you can say, Everybody knows that. I want to
tell you I didnt know it well enough early enough.

7. Seventh, now this is a lollapalooza, and Henry Kaufman wisely talked about this:
bias from over-influence by social proof -- that is, the conclusions of others,
particularly under conditions of natural uncertainty and stress.

And here, one of the cases the psychologists use is Kitty Genovese, where all these people
-- I dont know, 50, 60, 70 of them -- just sort of sat and did nothing while she was slowly
murdered. Now one of the explanations is that everybody looked at everybody else and
nobody else was doing anything, and so theres automatic social proof that the right thing
to do is nothing. Thats not a good enough explanation for Kitty Genovese, in my
judgment. Thats only part of it. There are microeconomic ideas and gain/loss ratios and
so forth that also come into play. I think time and time again, in reality, psychological
notions and economic notions interplay, and the man who doesnt understand both is a
damned fool.

Big-shot businessmen get into these waves of social proof. Do you remember some years
ago when one oil company bought a fertilizer company, and every other major oil
company practically ran out and bought a fertilizer company? And there was no more
damned reason for all these oil companies to buy fertilizer companies, but they didnt
know exactly what to do, and if Exxon was doing it, it was good enough for Mobil, and
vice versa. I think theyre all gone now, but it was a total disaster.

Now lets talk about efficient market theory, a wonderful economic doctrine that had a
long vogue in spite of the experience of Berkshire Hathaway. In fact one of the
economists who won -- he shared a Nobel Prize -- and as he looked at Berkshire Hathaway
year after year, which people would throw in his face as saying maybe the market isnt
quite as efficient as you think, he said, Well, its a two-sigma event. And then he said
we were a three-sigma event. And then he said we were a four-sigma event. And he
finally got up to six sigmas -- better to add a sigma than change a theory, just because the
evidence comes in differently. [Laughter] And, of course, when this share of a Nobel
Prize went into money management himself, he sank like a stone.

If you think about the doctrines Ive talked about, namely, one, the power of reinforcement
-- after all you do something and the market goes up and you get paid and rewarded and
applauded and what have you, meaning a lot of reinforcement, if you make a bet on a
market and the market goes with you. Also, theres social proof. I mean the prices on the
market are the ultimate form of social proof, reflecting what other people think, and so the

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combination is very powerful. Why would you expect general market levels to always be totally
efficient, say even in 1973-74 at the pit, or in 1972 or whatever it was when the Nifty 50 were in
their heyday? If these psychological notions are correct, you would expect some waves of
irrationality, which carry general levels, so theyre inconsistent with reason.

8. Nine [he means eight]: what made these economists love the efficient market
theory is the math was so elegant.

And after all, math was what theyd learned to do. To the man with a hammer, every
problem tends to look pretty much like a nail. The alternative truth was a little messy, and
theyd forgotten the great economists Keynes, whom I think said, Better to be roughly
right than precisely wrong.

9. Nine: bias from contrast-caused distortions of sensation, perception and cognition.

Here, the great experiment that Cialdini does in his class is he takes three buckets of water:
ones hot, ones cold and ones room temperature, and he has the student stick his left hand
in the hot water and his right hand in the cold water. Then he has them remove the hands
and put them both in the room temperature bucket, and of course with both hands in the
same bucket of water, one seems hot, the other seems cold because the sensation apparatus
of man is over-influenced by contrast. It has no absolute scale; its got a contrast scale in
it. And its a scale with quantum effects in it too. It takes a certain percentage change
before its noticed.

Maybe youve had a magician remove your watch -- I certainly have -- without your
noticing it. Its the same thing. Hes taking advantage of contrast-type troubles in your
sensory apparatus. But here the great truth is that cognition mimics sensation, and the
cognition manipulators mimic the watch-removing magician. In other words, people are
manipulating you all day long on this contrast phenomenon.

Cialdini cites the case of the real estate broker. And youve got the rube thats been
transferred into your town, and the first thing you do is you take the rube out to two of the
most awful, overpriced houses youve ever seen, and then you take the rube to some
moderately overpriced house, and then you stick him. And it works pretty well, which is
why the real estate salesmen do it. And its always going to work.

And the accidents of life can do this to you, and it can ruin your life. In my generation,
when women lived at home until they got married, I saw some perfectly terrible marriages
made by highly desirable women because they lived in terrible homes. And Ive seen
some terrible second marriages which were made because they were slight improvements
over an even worse first marriage. You think youre immune from these things, and you
laugh, and I want to tell you, you arent.

My favorite analogy I cant vouch for the accuracy of. I have this worthless friend I like to
play bridge with, and hes a total intellectual amateur that lives on inherited money, but he
told me once something I really enjoyed hearing. He said, Charlie, he say, If you throw
a frog into very hot water, the frog will jump out, but if you put the frog in room
temperature water and just slowly heat the water up, the frog will die there. Now I dont
know whether thats true about a frog, but its sure as hell true about many of the
businessmen I know [laughter], and there, again, it is the contrast phenomenon. But these

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are hot-shot, high-powered people. I mean these are not fools. If it comes to you in small pieces,
youre likely to miss, so if youre going to be a person of good judgment, you have to do something
about this warp in your head where its so misled by mere contrast.

10. Bias from over-influence by authority.

Well here, the Milgrim experiment, as it's called -- I think there have been 1,600
psychological papers written about Milgrim. And he had a person posing as an authority
figure trick ordinary people into giving what they had every reason to expect was heavy
torture by electric shock to perfectly innocent fellow citizens. And he was trying to show
why Hitler succeeded and a few other things, and so this really caught the fancy of the
world. Partly its so politically correct, and over-influence by authority

Youll like this one: You get a pilot and a co-pilot. The pilot is the authority figure. They
dont do this in airplanes, but theyve done it in simulators. They have the pilot do
something where the co-pilot, who's been trained in simulators a long time -- he knows
hes not to allow the plane to crash -- they have the pilot to do something where an idiot
co-pilot would know the plane was going to crash, but the pilots doing it, and the co-pilot
is sitting there, and the pilot is the authority figure. 25% of the time the plane crashes. I
mean this is a very powerful psychological tendency. Its not quite as powerful as some
people think, and Ill get to that later.

11. Eleven: bias from deprival super-reaction syndrome, including bias caused by
present or threatened scarcity, including threatened removal of something almost
possessed, but never possessed.

Here I took the Munger dog, a lovely, harmless dog. The only way to get that dog to bite
you is to try and take something out of its mouth after it was already there. And you know,
if youve tried to do takeaways in labor negotiations, youll know that the human version
of that dog is there in all of us. And I have a neighbor, a predecessor who had a little
island around the house, and his next door neighbor put a little pine tree on it that was
about three feet high, and it turned his 180 degree view of the harbor into 179 3/4. Well
they had a blood feud like the Hatfields and McCoys, and it went on and on and on

I mean people are really crazy about minor decrements down. And then, if you act on
them, then you get into reciprocation tendency, because you dont just reciprocate
affection, you reciprocate animosity, and the whole thing can escalate. And so huge
insanities can come from just subconsciously over-weighing the importance of what youre
losing or almost getting and not getting.

And the extreme business case here was New Coke. Coca-Cola has the most valuable
trademark in the world. Were the major shareholder -- I think we understand that
trademark. Coke has armies of brilliant engineers, lawyers, psychologists, advertising
executives and so forth, and they had a trademark on a flavor, and theyd spent the better
part of 100 years getting people to believe that trademark had all these intangible values
too. And people associate it with a flavor. And so they were going to tell people not that it
was improved, because you cant improve a flavor. A flavor is a matter of taste. I mean
you may improve a detergent or something, but dont think youre going to make a major
change in a flavor. So they got this huge deprival super-reaction syndrome.

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Pepsi was within weeks of coming out with old Coke in a Pepsi bottle, which wouldve been the
biggest fiasco in modern times. Perfect insanity. And by the way, both Goizuetta [Coke's CEO at
the time] and Keough [an influential former president and director of the company] are just
wonderful about it. I mean they just joke. Keough always says, I mustve been away on
vacation. He participated in every single decision -- hes a wonderful guy. And by the
way, Goizuetta is a wonderful, smart guy -- an engineer. Smart people make these terrible
boners. How can you not understand deprival super-reaction syndrome? But people do
not react symmetrically to loss and gain. Well maybe a great bridge player like
Zeckhauser does, but thats a trained response. Ordinary people, subconsciously affected
by their inborn tendencies

12. Bias from envy/jealousy.

Well envy/jealousy made, what, two out of the ten commandments? Those of you who
have raised siblings you know about envy, or tried to run a law firm or investment bank or
even a faculty? Ive heard Warren say a half a dozen times, Its not greed that drives the
world, but envy.

Here again, you go through the psychology survey courses, and you go to the index:
envy/jealousy, 1,000-page book, its blank. Theres some blind spots in academia, but its
an enormously powerful thing, and it operates, to a considerable extent, on the
subconscious level. Anybody who doesnt understand it is taking on defects he shouldnt
have.

13. Bias from chemical dependency.

Well, we dont have to talk about that. Weve all seen so much of it, but its interesting
how itll always cause this moral breakdown if theres any need, and it always involves
massive denial. See it just aggravates what we talked about earlier in the aviator case, the
tendency to distort reality so that its endurable.

14. Bias from mis-gambling compulsion.

Well here, Skinner made the only explanation youll find in the standard psychology
survey course. He, of course, created a variable reinforcement rate for his pigeons and his
mice, and he found that that would pound in the behavior better than any other
enforcement pattern. And he says, Ah ha! Ive explained why gambling is such a
powerful, addictive force in this civilization. I think that is, to a very considerable extent,
true, but being Skinner, he seemed to think that was the only explanation, but the truth of
the matter is that the devisors of these modern machines and techniques know a lot of
things that Skinner didnt know.

For instance, a lottery. You have a lottery where you get your number by lot, and then
somebody draws a number by lot, it gets lousy play. You have a lottery where people get
to pick their number, you get big play. Again, its this consistency and commitment thing.
People think if they have committed to it, it has to be good. The minute theyve picked it
themselves it gets an extra validity. After all, they thought it and they acted on it.

Then if you take the slot machines, you get bar, bar, walnut. And it happens again and
again and again. You get all these near misses. Well thats deprival super-reaction

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syndrome, and boy do the people who create the machines understand human psychology. And for
the high IQ-crowd theyve got poker machines where you make choices. So you can play blackjack,
so to speak, with the machine. Its wonderful what weve done with our computers to ruin
the civilization.

But at any rate, mis-gambling compulsion is a very, very powerful and important thing.
Look at whats happening to our country: every Indian has a reservation, every river town,
and look at the people who are ruined by it with the aid of their stock brokers and others.
And again, if you look in the standard textbook of psychology youll find practically
nothing on it except maybe one sentence talking about Skinners rats. That is not an
adequate coverage of the subject.

15. Bias from liking distortion, including the tendency to especially like oneself, ones
own kind and ones own idea structures, and the tendency to be especially
susceptible to being misled by someone liked. Disliking distortion, bias from that,
the reciprocal of liking distortion and the tendency not to learn appropriately
from someone disliked.

Well here, again, weve got hugely powerful tendencies, and if you look at the wars in part
of the Harvard Law School, as we sit here, you can see that very brilliant people get into
this almost pathological behavior. And these are very, very powerful, basic, subconscious
psychological tendencies, or at least party subconscious.

Now lets get back to B.F. Skinner, man-with-a-hammer syndrome revisited. Why is man-
with-a-hammer syndrome always present? Well if you stop to think about it, its incentive-
caused bias. His professional reputation is all tied up with what he knows. He likes
himself and he likes his own ideas, and hes expressed them to other people -- consistency
and commitment tendency. I mean youve got four or five of these elementary
psychological tendencies combining to create this man-with-a-hammer syndrome.

Once you realize that you cant really buy your thinking -- partly you can, but largely you
cant in this world -- you have learned a lesson thats very useful in life. George Bernard
Shaw had a character say in The Doctors Dilemma, In the last analysis, every profession
is a conspiracy against the laity. But he didnt have it quite right, because it isnt so much
a conspiracy as it is a subconscious, psychological tendency.

The guy tells you what is good for him. He doesnt recognize that hes doing anything
wrong any more than that doctor did when he was pulling out all those normal gall
bladders. And he believes his own idea structures will cure cancer, and he believes that the
demons that hes the guardian against are the biggest demons and the most important ones,
and in fact they may be very small demons compared to the demons that you face. So
youre getting your advice in this world from your paid advisor with this huge load of
ghastly bias. And woe to you.

There are only two ways to handle it: you can hire your advisor and then just apply a
windage factor, like I used to do when I was a rifle shooter. Id just adjust for so many
miles an hour wind. Or you can learn the basic elements of your advisor's trade. You
dont have to learn very much, by the way, because if you learn just a little then you can
make him explain why hes right. And those two tendencies will take part of the warp out
of the thinking youve tried to hire done. By and large it works terribly. I have never seen

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a management consultants report in my long life that didnt end with the following paragraph:
"What this situation really needs is more management consulting." Never once. I always turn to the
last page. Of course Berkshire doesnt hire them, so I only do this on sort of a voyeuristic
basis. Sometimes Im at a non-profit where some idiot hires one. [Laughter]

16. Seventeen [he means 16]: bias from the non-mathematical nature of the human
brain in its natural state as it deal with probabilities employing crude heuristics,
and is often misled by mere contrast, a tendency to overweigh conveniently
available information and other psychologically misrouted thinking tendencies on
this list.

When the brain should be using the simple probability mathematics of Fermat and Pascal
applied to all reasonably obtainable and correctly weighted items of information that are of
value in predicting outcomes, the right way to think is the way Zeckhauser plays bridge.
Its just that simple. And your brain doesnt naturally know how to think the way
Zeckhauser knows how to play bridge. Now, you notice I put in that availability thing, and
there Im mimicking some very eminent psychologists [Daniel] Kahneman, Eikhout[?] (I
hope I pronounced that right) and [Amos] Tversky, who raised the idea of availability to a
whole heuristic of misjudgment. And they are very substantially right.

I mean ask the Coca-Cola Company, which has raised availability to a secular religion. If
availability changes behavior, you will drink a helluva lot more Coke if its always
available. I mean availability does change behavior and cognition. Nonetheless, even
though I recognize that and applaud Tversky and Kahneman, I dont like it for my personal
system except as part of a greater sub-system, which is youve got to think the way
Zeckhauser plays bridge. And it isnt just the lack of availability that distorts your
judgment. All the things on this list distort judgment. And I want to train myself to kind
of mentally run down the list instead of just jumping on availability. So thats why I state
it the way I do.

In a sense these psychological tendencies make things unavailable, because if you quickly
jump to one thing, and then because you jumped to it the consistency and commitment
tendency makes you lock in, boom, thats error number one. Or if something is very vivid,
which Im going to come to next, that will really pound in. And the reason that the thing
that really matters is now unavailable and whats extra-vivid wins is, I mean, the extra-
vividness creates the unavailability. So I think its much better to have a whole list of
things that would cause you to be less like Zeckhauser than it is just to jump on one factor.

Here I think we should discuss John Gutfreund. This is a very interesting human example,
which will be taught in every decent professional school for at least a full generation.
Gutfreund has a trusted employee and it comes to light not through confession but by
accident that the trusted employee has lied like hell to the government and manipulated the
accounting system, and it was really equivalent to forgery. And the man immediately says,
Ive never done it before, Ill never do it again. It was an isolated example. And of
course it was obvious that he was trying to help the government as well as himself, because
he thought the government had been dumb enough to pass a rule that hed spoken against,
and after all if the governments not going to pay attention to a bond trader at Salomon,
what kind of a government can it be?

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At any rate, this guy has been part of a little clique that has made, well, way over a billion dollars for
Salomon in the very recent past, and its a little handful of people. And so there are a lot of
psychological forces at work, and then you know the guys wife, and hes right in front of
you, and theres human sympathy, and hes sort of asking for your help, which encourages
reciprocation, and theres all these psychological tendencies are working, plus the fact hes
part of a group that had made a lot of money for you. At any rate, Gutfreund does not
cashier the man, and of course he had done it before and he did do it again. Well now you
look as though you almost wanted him to do it again. Or God knows what you look like,
but it isnt good. And that simple decision destroyed Jim Gutfreund, and its so easy to do.

Now lets think it through like the bridge player, like Zeckhauser. You find an isolated
example of a little old lady in the Sees Candy Company, one of our subsidiaries, getting
into the till. And what does she say? I never did it before, Ill never do it again. This is
going to ruin my life. Please help me. And you know her children and her friends, and
shed been around 30 years and standing behind the candy counter with swollen ankles.
When youre an old lady it isnt that glorious a life. And youre rich and powerful and
there she is: I never did it before, Ill never do it again. Well how likely is it that she
never did it before? If youre going to catch 10 embezzlements a year, what are the
chances that any one of them -- applying what Tversky and Kahneman called baseline
information -- will be somebody who only did it this once? And the people who have done
it before and are going to do it again, what are they all going to say? Well in the history of
the Sees Candy Company they always say, I never did it before, and Im never going to
do it again. And we cashier them. It would be evil not to, because terrible behavior
spreads.

Rememberwhat was it? Serpico? I mean you let that stuffyouve got social proof,
youve got incentive-caused bias, youve got a whole lot of psychological factors that will
cause the evil behavior to spread, and pretty soon the whole damnyour place is rotten,
the civilization is rotten. Its not the right way to behave. And I will admit that I
havewhen I knew the wife and children, I have paid severance pay when I fire somebody
for taking a mistress on an extended foreign trip. Its not the adultery I mind, its the
embezzlement. But there, I wouldnt do it like Gutfreund did it, where theyd been
cheating somebody else on my behalf. There I think you have to cashier. But if theyre
just stealing from you and you get rid of them, I dont think you need the last ounce of
vengeance. In fact I dont think you need any vengeance. I dont think vengeance is much
good.

17. Now we come to bias from over-influence by extra-vivid evidence.

Heres one thatIm at least $30 million poorer as I sit here giving this little talk because I
once bought 300 shares of a stock and the guy called me back and said, Ive got 1,500
more, and I said, Will you hold it for 15 minutes while I think about it? And the CEO
of this company -- I have seen a lot of vivid peculiarities in a long life, but this guy set a
world record; Im talking about the CEO -- and I just mis-weighed it. The truth of the
matter was the situation was foolproof. He was soon going to be dead, and I turned down
the extra 1,500 shares, and its now cost me $30 million. And thats life in the big city.
And it wasnt something where stock was generally available. So its very easy to mis-
weigh the vivid evidence, and Gutfreund did that when he looked into the mans eyes and
forgave a colleague.

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 18. Twenty-two [he means 18]: Mental confusion caused by information not
arrayed in the mind and theory structures, creating sound generalizations
developed in response to the question Why? Also, mis-influence from
information that apparently but not really answers the question Why? Also,
failure to obtain deserved influence caused by not properly explaining why.

Well we all know people whove flunked, and they try and memorize and they try and
spout back and they justit doesnt work. The brain doesnt work that way. Youve got
to array facts on the theory structures answering the question Why? If you dont do that,
you just cannot handle the world.

And now we get to Feuerstein, who was the general counsel with Salomon when
Gutfreund made his big error, and Feuerstein knew better. He told Gutfreund, You have
to report this as a matter of morality and prudent business judgment. He said, Its
probably not illegal, theres probably no legal duty to do it, but you have to do it as a
matter of prudent conduct and proper dealing with your main customer. He said that to
Gutfreund on at least two or three occasions. And he stopped. And, of course, the
persuasion failed, and when Gutfreund went down, Feuerstein went with him. It ruined a
considerable part of Feuersteins life.

Well Feuerstein, [who] was a member of the Harvard Law Review, made an elementary
psychological mistake. You want to persuade somebody, you really tell them why. And
what did we learn in lesson one? Incentives really matter? Vivid evidence really works?
He shouldve told Gutfreund, Youre likely to ruin your life and disgrace your family and
lose your money. And is Mozer worth this? I know both men. That wouldve worked.
So Feuerstein flunked elementary psychology, this very sophisticated, brilliant lawyer.
But dont you do that. Its not very hard to do, you know, just to remember that Why? is
very important.

19. Other normal limitations of sensation, memory, cognition and knowledge.

Well, I dont have time for that.

20. Stress-induced mental changes, small and large, temporary and permanent.

Here, my favorite example is the great Pavlov. He had all these dogs in cages, which had
all been conditioned into changed behaviors, and the great Leningrad flood came and it just
went right up and the dogs in a cage. And the dog had as much stress as you can imagine
a dog ever having. And the water receded in time to save some of the dogs, and Pavlov
noted that theyd had a total reversal of their conditioned personality. And being the great
scientist he was, he spent the rest of his life giving nervous breakdowns to dogs, and he
learned a helluva lot that I regard as very interesting.

I have never known any Freudian analyst who knew anything about the last work of
Pavlov, and Ive never met a lawyer who understood that what Pavlov found out with
those dogs had anything to do with programming and de-programming and cults and so
forth. I mean the amount of elementary psychological ignorance that is out there in high
levels is very significant[?].

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 21. Then weve got other common mental illnesses and declines, temporary and
permanent, including the tendency to lose ability through disuse.

22. And then Ive got development and organizational confusion from say-something
syndrome.

And here my favorite thing is the bee, a honeybee. And a honeybee goes out and finds the
nectar and he comes back, he does a dance that communicates to the other bees where the
nectar is, and they go out and get it. Well some scientist who is clever, like B.F. Skinner,
decided to do an experiment. He put the nectar straight up. Way up. Well, in a natural
setting, there is no nectar where theyre all straight up, and the poor honeybee doesnt have
a genetic program that is adequate to handle what he now has to communicate. And youd
think the honeybee would come back to the hive and slink into a corner, but he doesnt.
He comes into the hive and does this incoherent dance, and all my life Ive been dealing
with the human equivalent of that honeybee. [Laughter] And its a very important part of
human organization so the noise and the reciprocation and so forth of all these people who
have what I call say-something syndrome dont really affect the decisions.

Now the time has come to ask two or three questions. This is the most important question
in this whole talk:

1. What happens when these standard psychological tendencies combine? What

happens when the situation, or the artful manipulation of man, causes several of these
tendencies to operate on a person toward the same end at the same time?

The clear answer is the combination greatly increases power to change behavior, compared
to the power of merely one tendency acting alone. Examples are:

Tupperware parties. Tupperwares now made billions of dollars out of a few

manipulative psychological tricks. It was so schlocky that directors of Justin Darts
company resigned when he crammed it down his boards throat. And he was
totally right, by the way, judged by economic outcomes.

Moonie [as in Sun Myung Moon and the Unification Church] conversion methods:
boy do they work. He just combines four or five of these things together.

The system of Alcoholics Anonymous: a 50% no-drinking rate outcome when

everything else fails? Its a very clever system that uses four or five psychological
systems at once toward, I might say, a very good end.

The Milgrim experiment. Its been widely interpreted as mere obedience, but the
truth of the matter is that the experimenter who got the students to give the heavy
shocks in Milgrim, he explained why. It was a false explanation. We need this to
look for scientific truth, and so on. That greatly changed the behavior of the
people. And number two, he worked them up: tiny shock, a little larger, a little
larger. So commitment and consistency tendency and the contrast principle were
both working in favor of this behavior. So again, its four different psychological
tendencies.

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When you get these lollapalooza effects you will almost always find four or five of these things
working together.

When I was young there was a whodunit hero who always said, Cherche la femme. [In
French, "Look for the woman."] What you should search for in life is the combination,
because the combination is likely to do you in. Or, if youre the inventor of Tupperware
parties, its likely to make you enormously rich if you can stand shaving when you do it.

One of my favorite cases is the McDonald-Douglas airliner evacuation disaster. The

government requires that airliners pass a bunch of tests, one of them is evacuation: get
everybody out, I think its 90 seconds or something like that. Its some short period of
time. The government has rules, make it very realistic, so on and so on. You cant select
nothing but 20-year-old athletes to evacuate your airline. So McDonald-Douglas
schedules one of these things in a hangar, and they make the hangar dark and the concrete
floor is 25 feet down, and theyve got these little rubber chutes, and theyve got all these
old people, and they ring the bell and they all rush out, and in the morning, when the first
test is done, they create, I dont know, 20 terrible injuries when people go off to hospitals,
and of course they scheduled another one for the afternoon.

By the way they didnt read[?] the time schedule either, in addition to causing all the
injuries. Wellso what do they do? They do it again in the afternoon. Now they create
20 more injuries and one case of a severed spinal column with permanent, unfixable
paralysis. These are engineers, these are brilliant people, this is thought over through in a
big bureaucracy. Again, its a combination of [psychological tendencies]: authorities told
you to do it. He told you to make it realistic. Youve decided to do it. Youd decided to
do it twice. Incentive-caused bias. If you pass you save a lot of money. Youve got to
jump this hurdle before you can sell your new airliner. Again, three, four, five of these
things work together and it turns human brains into mush. And maybe you think this
doesnt happen in picking investments? If so, youre living in a different world than I am.

Finally, the open-outcry auction. Well the open-outcry auction is just made to turn the
brain into mush: youve got social proof, the other guy is bidding, you get reciprocation
tendency, you get deprival super-reaction syndrome, the thing is going away I mean it
just absolutely is designed to manipulate people into idiotic behavior.

Finally the institution of the board of directors of the major American company. Well, the
top guy is sitting there, hes an authority figure. Hes doing asinine things, you look
around the board, nobody else is objecting, social proof, its okay? Reciprocation
tendency, hes raising the directors fees every year, hes flying you around in the corporate
airplane to look at interesting plants, or whatever in hell they do, and you go and you really
get extreme dysfunction as a corrective decision-making body in the typical American
board of directors. They only act, again the power of incentives, they only act when it gets
so bad it starts making them look foolish, or threatening legal liability to them. Thats
Mungers rule. I mean there are occasional things that dont follow Mungers rule, but by
and large the board of directors is a very ineffective corrector if the top guy is a little nuts,
which, of course, frequently happens.

2. The second question: Isnt this list of standard psychological tendencies improperly
tautological compared with the system of Euclid? That is, arent there overlaps?
And cant some items on the list be derived from combinations of other items?

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The answer to that is, plainly, yes.

3. Three: What good, in the practical world, is the thought system indicated by the
list? Isnt practical benefit prevented because these psychological tendencies are
programmed into the human mind by broad evolution so we cant get rid of them?
[By] broad evolution, I mean the combination of genetic and cultural evolution, but
mostly genetic.

Well the answer is the tendencies are partly good and, indeed, probably much more good
than bad, otherwise they wouldnt be there. By and large these rules of thumb, they work
pretty well for man given his limited mental capacity. And thats why they were
programmed in by broad evolution. At any rate, they cant be simply washed out
automatically and they shouldnt be. Nonetheless, the psychological thought system
described is very useful in spreading wisdom and good conduct when one understands it
and uses it constructively.

Here are some examples:

One: Karl Brauns communication practices. He designed oil refineries with

spectacular skill and integrity. He had a very simple rule. Remember I said, Why
is it important? You got fired in the Braun company. You had to have five Ws.
You had to tell Who, What you wanted to do, Where and When, and you had to tell
him Why. And if you wrote a communication and left out the Why you got fired,
because Braun knew its complicated building an oil refinery. It can blow upall
kinds of things happen. And he knew that his communication system worked
better if you always told him why. Thats a simple discipline, and boy does it
work.
Two: the use of simulators in pilot training. Here, again, abilities attenuate with
disuse. Well the simulator is Gods gift because you can keep them fresh.
Three: The system of Alcoholics Anonymous, thats certainly a constructive use of
somebody understanding psychological tendencies. I think they just wandered into
it, as a matter of fact, so you can regard it as kind of an evolutionary outcome. But
just because theyve wandered into it doesnt mean you cant invent its equivalent
when you need it for a good purpose.
Four: Clinical training in medical schools: heres a profoundly correct way of
understanding psychology. The standard practice is watch one, do one, teach one.
Boy does that pound in what you want pounded in. Again, the consistency and
commitment tendency. And that is a profoundly correct way to teach clinical
medicine.
Five: The rules of the U.S. Constitutional Convention: totally secret, no vote until
the whole vote, then just one vote on the whole Constitution. Very clever
psychological rules, and if they had a different procedure, everybody wouldve
been pushed into a corner by his own pronouncements and his own oratory and his
own And no recorded votes until the last one. And they got it through by a
whisker with those wise rules. We wouldnt have had the Constitution if our
forefathers hadnt been so psychologically acute. And look at the crowd we got
now.

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 Six: the use of grannys rule. I love this. One of the psychologists who works
for the Center gets paid a fortune running around America, and he teaches
executives to manipulate themselves. Now grannys rule is you dont get the ice
cream unless you eat your carrots. Well granny was a very wise woman. That is a
very good system. And so this guy, a very eminent psychologist, he runs around
the country telling executives to organize their day so they force themselves to do
whats unpleasant and important by doing that first, and then rewarding themselves
with something they really like doing. He is profoundly correct.
Seven: the Harvard Business Schools emphasis on decision trees. When I was
young and foolish I used to laugh at the Harvard Business School. I said, Theyre
teaching 28-year-old people that high school algebra works in real life? Were
talking about elementary probability. But later I wised up and I realized that it was
very important that they do that, and better late than never.
Eight: the use of post-mortems at Johnson & Johnson. At most corporations if you
make an acquisition and it turns out to be a disaster, all the paperwork and
presentations that caused the dumb acquisition to be made are quickly forgotten.
Youve got denial, youve got everything in the world. Youve got Pavlovian
association tendency. Nobody even wants to even be associated with the damned
thing or even mention it. At Johnson & Johnson, they make everybody revisit their
old acquisitions and wade through the presentations. That is a very smart thing to
do. And by the way, I do the same thing routinely.
Nine: the great example of Charles Darwin is he avoided confirmation bias.
Darwin probably changed my life because Im a biography nut, and when I found
out the way he always paid extra attention to the disconfirming evidence and all
these little psychological tricks. I also found out that he wasnt very smart by the
ordinary standards of human acuity, yet there he is buried in Westminster Abbey.
Thats not where Im going, Ill tell you. And I said, My God, heres a guy that,
by all objective evidence, is not nearly as smart as I am and hes in Westminster
Abbey? He must have tricks I should learn. And I started wearing little hair shirts
like Darwin to try and train myself out of these subconscious psychological
tendencies that cause so many errors. It didnt work perfectly, as you can tell from
listening to this talk, but it wouldve been even worse if I hadnt done what I did.
And you can know these psychological tendencies and avoid being the patsy of all
the people that are trying to manipulate you to your disadvantage, like Sam Walton.
Sam Walton wont let a purchasing agent take a handkerchief from a salesman. He
knows how powerful the subconscious reciprocation tendency is. That is a
profoundly correct way for Sam Walton to behave.
Ten: Then there is the Warren Buffett rule for open-outcry auctions: dont go. We
dont go to the closed-bid auctions too because theythats a counter-productive
way to do things ordinarily for a different reason, which Zeckhauser would
understand.

4. Four: What special knowledge problems lie buried in the thought system indicated
by the list?

Well one is paradox. Now were talking about a type of human wisdom that the more
people learn about it, the more attenuated the wisdom gets. Thats an intrinsically
paradoxical kind of wisdom. But we have paradox in mathematics and we dont give up
mathematics. I say damn the paradox. This stuff is wonderfully useful. And by the way,

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 the grannys rule, when you apply it to yourself, is sort of a paradox in a paradox. The manipulation
still works even though you know youre doing it. And Ive seen that done by one person to another.
I drew this beautiful woman as my dinner partner a few years ago, and Id never seen her
before. Well, shes married to prominent Angelino, and she sat down next to me and she
turned her beautiful face up and she said, Charlie, she said, What one word accounts for
your remarkable success in life? And I knew I was being manipulated and that shed
done this before, and I just loved it. I mean I never see this woman without a little lift in
my spirits. And by the way I told her I was rational. Youll have to judge yourself
whether thats true. I may be demonstrating some psychological tendency I hadnt planned
on demonstrating.

How should the best parts of psychology and economics interrelate in an enlightened
economist's mind? Two views: thats the thermodynamics model. You know, you cant
derive thermodynamics from plutonium, gravity and laws of mechanics, even though its a
lot of little particles interacting. And here is this wonderful truth that you can sort of
develop on your own, which is thermodynamics. And some economists -- and I think
Milton Friedman is in this group, but I may be wrong on that -- sort of like the
thermodynamics model. I think Milton Friedman, who has a Nobel prize, is probably a
little wrong on that. I think the thermodynamics analogy is over-strained. I think
knowledge from these different soft sciences have to be reconciled to eliminate conflict.
After all, theres nothing in thermodynamics thats inconsistent with Newtonian mechanics
and gravity, and I think that some of these economic theories are not totally consistent with
other knowledge, and they have to be bent. And I think that these behavioral
economicsor economists are probably the ones that are bending them in the correct
direction.

Now my prediction is when the economists take a little psychology into account that the
reconciliation will be quite endurable. And here my model is the procession of the
equinoxes. The world would be simpler for a long-term climatologist if the angle of the
axis of the Earths rotation, compared to the plane of the Euclyptic, were absolutely fixed.
But it isnt fixed. Over every 40,000 years or so theres this little wobble, and that has
pronounced long-term effects. Well in many cases what psychology is going to add is just
a little wobble, and it will be endurable. Here I quote another hero of mine, which of
course is Einstein, where he said, The Lord is subtle, but not malicious. And I dont
think its going to be that hard to bend economics a little to accommodate whats right in
psychology.

5. Fifth: The final question is: If the thought system indicated by this list of
psychological tendencies has great value not recognized and employed, what should
the educational system do about it?

I am not going to answer that one now. I like leaving a little mystery.

Have I used up all the time so theres no time for questions?

Moderator: I think that what were going to do is were going to borrow a little bit of time from the
end of the day questions, and were going to move it and allocate it to Charles Munger, if
that's acceptable to everybody.

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 Munger: By the way, the dean of the Stanford Law School is here today, Paul Brest, and he is
trying to create a course at the Stanford Law School that tries to work stuff similar to this into
worldly wisdom for lawyers, which I regard as a profoundly good idea, and he wrote an
article about it, and youll be given a copy along with Cialdinis book. [The article Mr.
Munger is referring to is called "On Teaching Professional Judgment" by Paul Brest and
Linda Krieger. It was published in the July 1994 edition of the Washington Law
Review.] Questions?

Audience
Member #1: Will we be able to get a copy of that list of 24 [standard causes of human misjudgment]?

Munger: Yes. I presumed there would be one curious man [laughter], and I have it and Ill put it
over there on the table, but dont take more than one, because I didnt anticipate such a big
crowd. And if we run short, Im sure the Center is up to making other copies.

Audience
Member #2: If I had listened to this talk I might have thought that Charles Munger was a psychology
professor operating in a business school. Every once in a while a micro-issue -- you told
us how you wouldve deal with one of these issues, for example with the unfortunate lady
Sees -- but you didnt tell us how these tendencies affected you and whats probably the
most important, or one of the most important elements of your success, which was
deciding where to invest your money. And Im wondering if you might relate some of
these principles to some of your past decisions that way.

Munger: Well of course an investment decision in the common stock of a company frequently
involves a whole lot of factors interacting. Usually, of course, theres one big, simple
model, and a lot of those models are microeconomic. And I have a little list of -- it
wouldnt be nearly 24, of those -- but I dont have time for that one. And I dont have too
much interest in teaching other people how to get rich. And that isnt because I fear the
competition or anything like that -- Warren has always been very open about what hes
learned, and I share that ethos. My personal behavior model is Lord Keynes: I wanted to
get rich so I could be independent, and so I could do other things like give talks on the
intersection of psychology and economics. I didnt want to turn it into a total obsession.

Audience
Member #3: Out of those 24, could you tell us the one rule thats most important?

Munger: I would say the one thing that causes the most trouble is when you combine a bunch of
these together, you get this lollapalooza effect. And again, if you read the psychology
textbooks, they dont discuss how these things combine, at least not very much. Do they
multiply? Do they add? How does it work? Youd think itd be just an automatic subject
for research, but it doesnt seem to turn the psychology establishment on. I think this is a
man from Mars approach to psychology.

I just reached in and took what I thought I had to have. That is a different set of incentives
from rising in an economic establishment where the rewards system, again, the
reinforcement, comes from being a truffle hound. Thats what Jacob Viner, the great
economist called it: the truffle hound -- an animal so bred and trained for one narrow
purpose that he wasnt much good at anything else, and that is the reward system in a lot of
academic departments. It is not necessarily for the good. It may be fine if you want new

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drugs or something. You want people stunted in a lot of different directions so they can grow in one
narrow direction, but I dont think its good teaching psychology to the masses. In fact, I think its
terrible.

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